WEAKNESSES

Diminishing hydrocarbon reserves and exposure to their price fluctuation

Very acute socio-political tensions between the Sunnite minority and the majority Shiite population

Uncertain regional geopolitical environment

Dependence on foreign labour

Risk assessment

Sluggish growth in 2016

In the face of the weak oil market, the Bahraini economy demonstrated its resilience in 2015. Even if, the economic performances continued to feel the negative effects of low oil prices, the non-oil and gas sector proved robust. Economic activity should however slow in 2016 as other economic sectors feel the impact of the oil and gas sector slowdown. Moreover, with the oil industry reaching its maximum production capacity, the country will struggle to increase its oil and gas output to offset the effect of lower prices on its revenues. The planned extension to its production lines by Alba (Bahrain Aluminium), the leading operator in the iron and steel sector, should enable it to increase its aluminium production in 2016. The competitiveness of the aluminium sector could however suffer under the impact of higher gas prices charged to the industrial sector as decided by the government as of April 2015. The financial sector, which is one of the most dynamic in the region and which accounts for more than 16% of the country’s added-value, should report positive performances even if the reduction in oil and gas activity and slower growth in wages could act to limit any growth in deposits.

To a lesser extent than previously, consumption and investment will continue to make positive contributions to activity. Public investment spending will continue to sustain activity through major infrastructure projects financed with aid from other GCC countries. Saudi Arabia confirmed a support agreement in June 2015 worth USD 670 M through its development aid fund which should help finance the construction of homes, the expansion of the electricity network and the construction of several transmission stations.

State of public finances remains critical

As the public revenues of Bahrain are highly dependent on oil and gas revenues, public finances remain extremely exposed to oil and gas price movements. The weakness of oil and gas prices resulted in a doubling of the public deficit in 2015. In 2016, the public deficit is likely to shrink slightly but remain above the 10% mark. Measures aimed at offsetting lower oil and gas revenues are being considered and namely a reduction in energy subsidies. There is a proposal before parliament for changes to the subsidy regime. This aims to replace food and energy subsidies with aid paid directly to the local population, thereby excluding certain expatriates from the subsidy system.

Bahrain needs to make continued use of debt in order to finance its large public deficit. The public debt is thus expanding significantly and therefore increasing the sovereign debt risk. Debt is mainly held by commercial banks and more than half of the public debt is external. It does consist mainly, however, of long-term bonds and the government is attempting to diversify its financing with increasing use of Islamic finance channels.

Significant increase in the current account deficit

The current account deficit will worsen in 2016 as oil and gas exports suffer with low crude oil prices and reduced vitality in the refining segment. The repatriation of profits by foreign companies as well as reduced remittances from foreign workers will feed the balance of the services and revenues deficit. In addition, FDI flows could weaken. The attractiveness of Bahrain’s financial sector is being eroded by other regional financial markets. The negative outlook, together with the downgrading of its sovereign bond credit by the various rating agencies will further undermine confidence among investors.

Persisting socio-political tensions in a changing regional context

The government continues to face protests over the arrest of Shiite militants and the stripping of nationality. In June 2015, Sheikh Ali Salman, the figurehead of the Shiite movement, was arrested and sentenced to 4 years in prison for political activism. The tensions between the majority Shiite population and the Sunni ruling elite have been further heightened following the attack in the country on 28 July 2015. In addition, the political claims of the Shiite community continued to taint relations with Iran, blamed by Bahrain as responsible for the July 2015 attacks. In regional terms, Bahrain continues to receive the complete support of its Saudi neighbour and adopts its foreign policy.

This situation is having a negative impact on a previously favourable business climate, thanks to efforts to improve local skill levels, stimulate the private sector and attract more foreign investment.